3-38 CVP analysis, shoe stores. The WalkRite Shoe Company operates a chain of shoe stores that sell | ||||||||||||||

10 different styles of inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as | ||||||||||||||

a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a | ||||||||||||||

fixed salary and a sales commission. WalkRite is considering opening another store that is expected to have | ||||||||||||||

the revenue and cost relationships shown here: | ||||||||||||||

1 | Unit Variable Data (per pair of shoes) | Annual Fixed Costs | ||||||||||||

2 | Selling Price | $30.00 | Rent | $60,000 | ||||||||||

3 | Cost of shoes | $19.50 | Salaries | 200,000 | ||||||||||

4 | Sales commission | $1.50 | Advertising | 80,000 | ||||||||||

5 | Variable cost per unit | $21.00 | Other fixed costs | 20,000 | ||||||||||

6 | Total fixed costs | $360,000 | ||||||||||||

Consider each question independently: Required | ||||||||||||||

1. What is the annual breakeven point in (a) units sold and (b) revenues? | ||||||||||||||

A) | Break-even point in units = Fixed cost/(Selling price per unit – Variable cost per unit) | |||||||||||||

$40,000 | actually | 40,000 | units | |||||||||||

B) | Break-even point in revenue = Break-even point in units* selling price per pair | |||||||||||||

$1,200,000 | ||||||||||||||

2. If 35,000 units are sold, what will be the store’s operating income (loss)? | ||||||||||||||

Contribution per unit = Selling price per unit – Variable cost per unit | ||||||||||||||

$9.00 | ||||||||||||||

Total contribution = number of units that are sold* contribution per unit | ||||||||||||||

$315,000 | ||||||||||||||

Operating income (loss) = Total contributions of units sold – Total fixed cost | ||||||||||||||

($45,000) | ||||||||||||||

3. If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be | ||||||||||||||

the annual breakeven point in (a) units sold and (b) revenues? | ||||||||||||||

A) | Total fixed costs = originally reported fixed costs + the raise in fixed salaries | |||||||||||||

$441,000 | ||||||||||||||

Break-even point in units = Fixed costs/(Selling price per unit – Variable cost per unit) | ||||||||||||||

$49,000 | actually | 49,000 | units | |||||||||||

B) | Break-even point in revenues = Break-even point in units*selling price per pair | |||||||||||||

$1,470,000 | ||||||||||||||

4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of | ||||||||||||||

$0.30 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues? | ||||||||||||||

A) | Total variable cost per pair of shoes if manager is paid a commission of $.30 per unit sold = Orginal variable costs + managers commission | |||||||||||||

$21.30 | ||||||||||||||

Contibution per unit = Selling price per unit – Variable cost per unit | ||||||||||||||

$8.70 | ||||||||||||||

Break-even point in units = Fixed costs/(Selling price per unit – Variable cost per unit) | ||||||||||||||

$41,379.31 | actually | 41,380 | units sold | |||||||||||

B) | Break-even point in revenues = Break-even in units sold*selling price per pair | |||||||||||||

$1,241,400 | ||||||||||||||

5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission | ||||||||||||||

of $0.30 per unit in excess of the breakeven point, what would be the store’s operating income if | ||||||||||||||

50,000 units were sold? | ||||||||||||||

Total revenue = number of shoes sold * selling price | ||||||||||||||

$1,500,000 | ||||||||||||||

Cost of shoes = number of shoes*cost of shoes per pair | ||||||||||||||

$975,000 | ||||||||||||||

Sales commission if $.30 per pair*number of shoes sold | ||||||||||||||

$15,000 | ||||||||||||||

Operating income | ||||||||||||||

Revenue | $1,500,000 | |||||||||||||

Less: | ||||||||||||||

Cost of shoes | $975,000 | |||||||||||||

Sales commission | $15,000 | |||||||||||||

Total fixed costs | $360,000 | |||||||||||||

Total cost | $150,000 | |||||||||||||

Operating income | $1,350,000 |

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